Escrow Account is used to collect and hold funds to pay for property taxes homeowners insurance premiums or other charges when they become due.
Escrow account is established for you by your mortgage lender and you make payments monthly along with your mortgage payment.
Escrow payment is an amount over and above the principal and interest portion of a mortgage payment. The sum total of all elements is referred to as PITI, for “Principal, Interest, Tax, and Insurance”.
Some mortgage lenders require borrowers to maintain an escrow account that pays the property taxes and homeowners insurance. While, other lenders offer it as an option for borrowers.
Borrowers without an escrow account typically pay property tax once a year (can be paid in two installments) and homeowners insurance in one payment (monthly installments is available).
FHA loans require the lender to maintain an escrow account for the life of the loan.
Calculating Payment for Escrow Account
The amount of your monthly mortgage payment, plus property taxes and homeowners insurance is collected by your mortgage company. The escrow funds can be used only to pay property taxes and home insurance on your behalf.
Your mortgage company pays the taxes and insurance bills for you when they are due. Your mortgage company may make adjustment to escrow payment when there are changes in your property tax and home insurance costs.
Example of how escrow payments are calculated:
Annual property taxes: $2,400 / 12 months = $200 per month
Annual homeowners insurance: $660 / 12 months = $55 per month
Total monthly taxes and insurance: $255
If your mortgage payment is $1,500, then your total monthly payment or PITI (Principal, Interest, Tax, and Insurance) is $1,755.
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